Have you heard of the term “streamline” refinance? Lenders certainly have and when you discover what this process actually is, you may very well decide it’s time to refinance after all. A refinance is where an existing mortgage is completely replaced by a new one. The term was originally coined when the Federal Housing Administration, or FHA, first introduced this low-documentation loan back in the 1980s. Let’s take a closer look.
Recall when you first bought your home and applied for a
mortgage. The amount of documentation required was rather extensive as it
relates to income, employment, assets, credit and the property being financed.
Two years of W2 forms, most recent pay check stubs covering a 30 day period,
verification of employment from the employer, most recent bank statements, a
credit report and credit scores and a full property appraisal. If the applicant
was self-employed, then two years of income tax returns were needed in addition
to a year-to-date profit and loss statement. Lenders can’t ignore these
documentation guidelines if they want to have a loan eligible for sale in the
secondary markets or be eligible for compensation should the loan go into
With a streamline, the amount of documentation needed to
process and approve a refinance essentially ignores most of that paperwork. With
a streamline there are no pay check stubs needed, no W2 forms, no bank
statements, no minimum credit score requirements and no property appraisal. Why
the removal of such documentation when refinancing when that very same limited
approval could have been performed the first time around?
Getting approved for a streamline refinance isn’t as easy as
waving a magic wand but it’s still much easier compared to fully documenting a
loan for a purchase. There are some guidelines that must be followed but the
first step is to identify the “net tangible benefit.” The net tangible benefit
lays out the guidelines for determining if a refinance benefits the borrowers
instead of just making another loan and selling the loan for a profit. What sort
of benefit qualifies?
The most important is to lower the monthly payment. This is
done by comparing the current rate with the proposed rate and reviewing the
difference in monthly payments. Generally speaking, the effective payment must
drop by about one-half of one percent. This is a common sense approach to
refinancing. If a homeowner is making the mortgage payments on time that same
homeowner would still be able to make the monthly payments when lowered.
A streamline can also benefit the homeowner when switching
from an adjustable rate mortgage, or ARM, to a fixed rate loan. With an ARM,
the interest rate can and likely will adjust at some point in the future based
upon the terms of the original note. This instability can be eliminated by the
stability of a fixed rate loan.
Streamline refinances can be approved when replacing one
loan with the same type of loan. For instance, an FHA streamline can be used
when replacing an existing FHA loan. The same goes for a VA loan or USDA loan.
Credit reports aren’t needed nor are there any minimum credit
scores but lenders do want to take a look at your mortgage payment history.
Streamline guidelines ask there be no more than one payment made more than 30
days past the due date over the last 12 months and no such late payments within
the last six. The existing loan may also need a “seasoning” requirement. Seasoning
means how long the loan has been in existence. FHA seasoning requirements ask
the loan be at least 210 days old, for example. In addition, there may be other
requirements beyond what the FHA needs. As it relates to value, there is no
appraisal needed. Instead, the lender will use the original purchase price as
the appraised value. This works even though the property may have lowered in
value since the purchase.
There will be closing costs associated with a streamline refinance
but because less documentation is needed the overall costs will be lower. You can
get an estimate of the types of closing fees you can expect at closing with a
Cost Estimate I can provide. If you’ve been thinking about refinancing but aren’t
sure if you’re ready to dive into the loan application process all over again
but do want to lower your payment or get out of your ARM and into a fixed rate
loan, give me a call and let’s talk more to see if a streamline refinance is in